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Month: January 2016

Don Boudreaux drew my attention to an essay in the NYT from a few days ago by Steven Rattner. There’s a lot in the article, but I want to discuss one thing in particular he gets very wrong:

Then I went rogue and uttered two blasphemous words: “Ross Perot.” He had a point, I said heretically, when he campaigned in 1992 against the landmark North American Free Trade Agreement, saying that it would result in a “giant sucking sound” of jobs headed south to Mexico.

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Last year, according to the recent figures, our nation added 2.65 million new jobs. Just 30,000 of them were in manufacturing. So much for the widely trumpeted renaissance of Made in America.

At first glance, the automobile industry looks to be in better shape. From the depths of the crisis in 2009 through 2013, employment in the auto manufacturing sector in the United States rose by 23 percent, to 690,000 from 560,000.

That sounds pretty good, I said, except that employment in the Mexican auto sector rose to 589,000 from 368,000 during the same period, an increase of 60 percent. I’m happy that 221,000 more Mexicans got jobs, but let’s be honest: Absent open borders, many of those jobs would have been in America. [Emphasis mine]

There are several things he gets wrong here. Not necessarily errors of fact, but rather of cause/effect and reason.

First off, there certainly is a renaissance of “Made in America” going on right now. Near-shoring is proceeding to a large extent and factories for all kinds of goods and services, from textiles to automobiles, are popping up across the nation. The difference between these factories and factories in the past is these factories are much more automated. They’re filled with machines, not men. Mr. Rattner makes the mistake of confusing inputs (labor) with output (manufactured goods). He readily dismisses the “made in America” argument because there are less workers in factories. That is correct, but the US is still a manufacturing powerhouse and, as I mentioned in previousposts, the US still manufactures a lot. The US has become more efficient in manufacturing, requiring fewer inputs for more output. To claim US manufacturing is in trouble, or being siphoned off to another country, when only looking at the inputs would be like arguing Americans drive less because our cars use less fuel to go where they need to go.

Second, Mr. Rattner’s argument that, absent open borders, those Mexican jobs would have stayed in America makes several key assumptions that may or may not be true. It assumes Mexican labor efficiency is equal to US efficiency. If this is not the case, then in a closed economy, the number of jobs “protected” would be less than then the number of jobs “created” in Mexico (for example: if it takes 3 Mexican workers to build a car, but only 1 American worker, then if a plant were to relocate back to America, only 1 American would have a new job, not 3). He also assumes that the quantity demanded for good made in Mexico would remain constant should production shift back to the US. This is likely not the case. Firms relocate operations in order to keep costs low. If a firm were forced to produce in the US, when Mexico is the preferable option, then it would likely mean a raise in the price of goods, in turn reducing quantity demanded.

Third (and this is a combination of my first two points), Mr. Rattner assumes that trade is the only way for jobs to be shed. However, automation is key here. As I mentioned above, US factories are becoming more automated. If the US were to repeal NAFTA (which, in the opinion of nearly every economist out there, would be a bad idea), the jobs sent to Mexico wouldn’t just appear back. The same level of production may be met with robots. Indeed, that is what we are seeing now in regards to near-shoring.

Is the US losing jobs to international trade? Not really. Productivity increases are more the cause. But the goal of economic progress isn’t to increase or maintain costs, but to maximize benefits. Having costs as the standard of economic policy, rather than benefits, can lead to horrible, and counterproductive, policy suggestions, like protectionist tariffs r closed borders.

I am unabashedly in favor of open borders, but there are some who are not. One of the small-government arguments against open borders is that the immigrants who come in could vote away individual freedoms. I’ve argued against this notion in the past (you can see all the posts by running a search for “open borders” on my blog).

Now, I’d like to address this argument from a strictly small-government point of view. I contend that closed borders and small government are mutually exclusive. Even if immigrants were to come in and demand a larger government, it would still be, on net, a smaller government than with closed borders. Remember that any form of immigration control necessarily requires a very large government with very broad powers (especially in a country like ours with very long borders). Their powers would have to intrude into nearly all forms of citizen life: who one can employ, who one can marry, who one can associate with, who one can buy from, etc etc. It would have to lead to a much larger police force to enforce these laws (such as the Border Patrol or INS). It would, in short, have to lead to a much larger police state!

I argue no. The difficult thing about defending freedom is defending it for everyone. Everyone has the freedom to movement, the freedom of speech, the freedom of thought regardless of what views they might hold. If we begin sacrificing liberties in order to make our job of promoting liberty easier, then we have abandoned our principles. We would become the very evil we want to fight. And that would be the death of liberty. The worst crimes of evil are committed by those who think they are doing good.

The sign of a good economist is the ability to see the unseen, to recognize the untraceable consequences of an action. In that sense, Tim Worstall is a good economist. This is a segment from his latest post on Forbes.com:

We have yet another entry into the crowded field of studies concerning the minimum wage in the restaurant industry. It says there isn’t that much effect either way and therefore all the usual suspects are all over it. The problem with the paper though is that it doesn’t actually make sense by its own internal logic. This error is actually right there in the introduction in fact. They manage to believe two entirely opposing things about that minimum wage. Firstly that it has no employment effects and secondly that it raises productivity. These cannot both be true: because a change in productivity has employment effects.

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It’s just not possible for both of those things to be true, that employment hasn’t been affected but that productivity has risen. Because productivity is the amount of labour you’re using to do something.

Tim is absolutely right. Productivity is the amount of labor (or capital, or other resources) you’re using to do something. If something comes along that increases productivity, then it must have an effect on the amount of a resource needed even if that doesn’t show up in the overall figures! An increase in productivity necessarily means a decrease in the amount of resources needed.

Unfortunately, this lesson is lost among many, including some economists. They do not see it in their outcomes, so therefore they ignore it entirely. This is the danger of relying solely on precise mathematical models and eschewing economic logic, as the authors of the study Worstall cites do (this also shows the danger of relying on journalists to report and interpret the data; Worstall shows us that the journalistic response to this study is to misinterpret the findings). But, as Frederic Bastiat taught us so many years ago, these unseen effects are very real.

A little while ago, I discussed some of the issues I had with economists who look unfavorably upon economic theories that don’t use “precise mathematical models.” In that post, I had discussed the inherent randomness free will injects into life, making precise calculations difficult. Now, I’d like to discuss something more economic.

Economist Thomas Sowell once said that there are no solutions, only trade-offs. He is absolutely right. this is one of the first lessons an economics student learns. He is taught to look for the unseen, to look for opportunity cost. Opportunity cost is, to put it simply, foregone opportunities; what you had to give up to pursue another opportunity.

By its very nature, opportunity costs are imprecise. They don’t occur, so they won’t show up in any statistic, but they are a very real thing. For example, a store plans to open in an area and create 300 new jobs, but decides not to pursue the opportunity because taxes are too high. Those lost 300 jobs will never show up in any statistic, but they are very real. Good economists will try to estimate their impact, but these estimates are just that: estimates, subject to the researchers’ bias and inherently imprecise.

When people look down on economic theories or models because they are imprecise, because they rely more upon logic and reasoning rather than mathematics, they are making the mistake that Henry Hazlitt says separates the good economist from the poor economist: he is failing to look for the unseen.

To paraphrase Darth Vader, don’t be too proud of this mathematical terror you’ve created. There is likely far more happening behind the scenes than you know.

A recent blog post by Jon Murphy caught my attention. Since the late 1970s there is a comeback of smaller breweries in the US. Before, since prohibition times, the industry was dominated by only very few players.

I know some older data on the US brewery industry from the FIVE project. Until 1988 the story of the brewing industry looked like a classical shakeout:

Number of breweries in the US, 1800 – 1988 (Source: Carroll-Swaminatha Brewery FIVE Data)

My intuitive explanation for the shakeout would be the improvement of supply chain management and distribution channels which allowed more efficient producers to penetrate the market effectively. Jon Murphy mentions regulation by the US government after the prohibition as another reason. But as the figure shows, the overall trend was already determined long before that. In fact, it is striking how fast the number of breweries finds its way back…

According to a report by the Brewers Association, the number of breweries in the United States reached an all-time high in 2015: 4,144 breweries were active in the country. Mark Perry was kind enough to chart the data for us:

What’s really interesting is the explosion of breweries since 1979. What happened in 1979 that caused such rapid growth? Jimmy Carter.

A brief history lesson: in 1920, an Amendment to the Constitution was passed that made alcohol illegal in the United States. In 1933, this Amendment was repealed, but beer brewing remained tightly regulated in the United States, essentially shutting out small brewers in favor of major players such as Budweiser, Coors, and Miller (another lesson: regulation protects big business, not hinders it). In this climate, Big Beer produced only one type of beer: pale lager. Homebrewing during this time period was effectively illegal. While nominally legal, any homebrewed beverage with an alcohol content more than 0.05% faced steep taxes. In 1979, Jimmy Carter signed into legislation HR 1337, which removed the taxation on home brew.

The repeal of the regulation of the beer industry opened the doors wide for home experimentation, and eventual commercialization, of new and exciting kinds of beer: IPAs, American pale ales, red ales, Belgium sour ales, fruit beer, and countless other types. This vastly expanded the beer industry’s offerings and lead to greater consumer choice (and thus a higher standard of living for consumers), the destruction of the Bud-Coors-Miller stranglehold on the market, and effectively the development of a new industry in America.

The moral of this story is: regulation kills diversity in the marketplace. Regulation artificially erects barriers to entry that prevents smaller, less-established participants from entering the market. Regulation protects monopolists (and monopsonists. Looking at you, minimum wage supporters) from competition, reducing their incentive to explore and innovate. Regulation leads to mediocrity, not wealth. It leads to a weaker consumer, not a stronger one.

Of course, none of this should be interpreted as all regulation is bad. No. Some regulation is good: regulation that enforces property rights is desirable. Regulation that tells consumers what they can or cannot buy is not.

This post is dedicated to my brother, Dennis, who has taught me to love beer.

Eagle-eyed readers will likely have noticed by now I spend an inordinate amount of time watching The Simpsons. New Years Eve was no exception. FXX aired a marathon and one episode they aired was the second season classic episode Simpson and Delilah.

In this episode, Homer gets promoted to Junior Executive. In his first executive meeting with Mr. Burns (the notoriously tight-fisted owner of the nuclear power plant where Homer works) is seeking methods to increase productivity at the plant. Homer suggests providing tartar sauce in the cafeteria when the plant serves fish sticks. The other executives immediately scoff at his plan, but Mr. Burns supports him. Is it out of the goodness of his heart? Not likely: this man literally steals candy from babies, steals money from the school, releases hounds on anyone who asks him for anything, and puts just a quarter in the collection plate at church. He’s not exactly a nice man. So why does Mr. Burns support the plan? In his own words:

A happy worker is a productive worker. The few cents we spent on tartar sauce will reap millions in profits from increased productivity!

Mr. Burns’ attitude is typical of profit-seeking executives. You have to spend money to make money and by increasing worker happiness, he can increase his profits. This is how workers, in a free market, increase their standard of living.

I want to emphasize the point that this is without any government interference or influence. Mr. Burns, who is literally the worst (this guy stole paintings from the Isabella Stewart Museum in Massachusetts so they couldn’t be gawked at by “slack-jawed yokels”), increases the worker benefits of his employees for his own personal gain. Government didn’t need to get involved because self-interest already had.